U.S. banking deregulation and local economic growth: A spatial analysis

The economic literature has largely ignored the existence of global common factors and local spatial dependence in the assessment of the real effects of U.S. banking deregulation. Motivated by consistency concerns, this study uses spatial econometric models with common factors to analyze the impact of U.S. banking deregulation on county-level economic growth during the 1970–2000 period. We estimate the direct effects of banking deregulation, as well as the size, geographic scope and source of any spatial spillovers. Statistically and economically significant growth effects were experienced by counties in states that deregulated intrastate branching, but only after an initial period without any growth effects. We find no significant growth effects of interstate banking deregulation. During the later half of the sample, intrastate branching deregulation increased the average expected annual growth rates of counties in the deregulated state by about 0.5 p.p. in the long run. Local spatial dependence turns out to be a crucial feature of county-level economic growth, even after common factors are accounted for. As a result, significant spatial spillovers of intrastate branching deregulation were experienced by counties in states surrounding the deregulated state during the later half of the sample. Intrastate branching deregulation increased the average expected annual growth rates of counties adjacent to the deregulated state by about 0.2 p.p. in the long run, while the spillovers to hinterland counties in adjacent states were still about 0.05–0.1 p.p. A comparison to models that ignore common factors or local spatial dependence substantiates our consistency concerns.